Wall Street’s research departments include both equity strategists and equity analysts.
Strategists publish targets for stock markets as a whole from their big-picture analysis (i.e., top-down analysis). Analysts publish price targets on individual stocks based on their analyses of the companies they cover (i.e. bottoms-up analysis).
For whatever reason, the aggregate earnings forecasts of the bottoms-up analysts have historically been significantly more bullish than the forecasts of the top-down strategists.
But that trend flipped this year. Veteran strategist Tom Lee attempted to explain this in a note to clients on Friday (emphasis added):
We believe the Street (analysts) have not properly accounted for the savings associated with lower oil — as we noted in a previous report, corporates spent nearly $US1T in energy/natural gas in 2014 and the estimated savings is $US350mm in 2015.
Strategists seem to have accounted for this relative to the street — basically, macro vs micro, evidenced by the fact that top-down Strategists 2015 EPS is $US4 above the Street. This is the first time in 7 years that the top-down is above the bottoms-up. In fact, even in the 2009 market lows, when the Strategists should have been looking for upside surprise (and therefore above the bottoms up), the Strategists were $US9 below the Street.
In other words, Lee seems to be implying that he and his peers are more right while the stock analysts out there are more wrong.
For the average investor with a long-term focus, there’s probably not a whole lot of actionable investment information to be derived here. Furthermore, it’s worth remember that strategist have a decades-long track record of being way off with their calls.
Still, it’s interesting to observe the discrepancies between the advice given by Wall Street’s strategists and Wall Street’s analysts.
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